When a company sells its bonds at less than face value, the effective interest rate is
A) lower than the yield rate.
B) higher than the contract interest rate.
C) lower than the nominal rate.
D) higher than the market interest rate.

Question

Quizplus · Accepted Answer

When a company sells its bonds at a discount (less than face value), the effective interest rate (yield to maturity) that investors receive is higher than the contract interest rate stated on the bond. This is because investors are paying less for the bond upfront but will still receive the full face value at maturity, in addition to the interest payments, which results in a higher overall return.

When a Company Sells Its Bonds at Less Than Face